NAMA’s annual accounts for 2011 handed over to Minister Noonan – will NAMA need more capital?

Today is the last day for NAMA to hand over its latest quarterly management report and accounts to Minister for Finance, Michael Noonan. The accounts will cover the three month period ending on 31st December 2011 and will also show the annual figures for 2011. For the first time in NAMA’s reporting of its results for 2011, we will see what NAMA calculates to be its so-called “impairment charge” – this will make the difference between profit, and remember NAMA was last week forecasting a profit before impairment of “at least €750m” and loss, sadly NAMA didn’t have an estimate of impairment charges last week. Although these accounts that are due today are not fully audited, and NAMA will not publish its full annual report until the summer, these accounts should give an accurate picture of NAMA’s performance in 2011. Here are seven things to look out for:

(1) The impairment charge. This charge represents the decline in value of what NAMA expects to recover on its loans to developers which totalled about €32bn by reference to NAMA’s acquisition values and €74bn by reference to the original values of the loans. The decline in value is largely driven by declines in underlying property values. In 2010, NAMA’s first full year of operation, NAMA booked a €1.485bn impairment charge. NAMA does not calculate an impairment charge every quarter and waits until the end of the year to conduct what is a large exercise. The betting on here is that the impairment charge will be in the order of €1bn for 2011, but unlike 2010, you can rest assured that the impairment charge for 2011 will be examined on here with a fine tooth comb.

(2) Will NAMA need more capital from the State? You’ll recall that NAMA is an entity with €100m of share capital, with €49m from the State and €51m from “three independent investors” – namely AIB, ILP and Bank of Ireland. And you’ll also recall that NAMA made a loss of €1.1bn in 2010, its first full year of operation. So you might have expected the €1.1bn loss to have wiped out the €0.1bn share capital but no, NAMA performed a little accounting trick whereby part of the payment it made to buy the €74bn of loans from the banks was classified as capital. The so-called “NAMA subordinated bonds” comprise 5%, or just over €1.5bn, of the €32bn that NAMA paid for the loans. NAMA doesn’t have to honour these subordinated bonds if by 2020 the Agency hasn’t broken even. So in 2010, NAMA got away with adding the €1.5bn to the €0.1bn share capital which meant that the Agency still had €0.5bn of “capital” left after deducting the €1.1bn loss. If NAMA makes a loss after impairment in 2011 of more than €0.5bn then NAMA will need to get more capital, something that it has been adamant it won’t need to do.

(3) NAMA’s interest income from developers. We now have considerable detail about the way in which NAMA calculates its interest income, and we know that NAMA doesn’t just account for cash received – it estimates additional interest it will receive when the underlying asset is eventually sold. This has led to all sorts of accusations of Enronesque behaviour, so the interest income reported for 2011 and impairments to that income will be closely examined to ensure NAMA is not overstating profits that will vanish when the assets underpinning the loans are eventually disposed of.

(4) NAMA’s provision for legal costs in the Paddy McKillen case. You’ll recall that Paddy took a case against NAMA in 2010 to stop the Agency from acquiring his loans. Paddy lost comprehensively in Dublin’s High Court but went on to substantially win his case at Dublin’s Supreme Court, and NAMA ended up having to foot the bill. It’s been a year now since the Supreme Court concluded its deliberations and NAMA recently told an Oireachtas committee that it had still not established the costs that the Agency will need pay in the case, though media speculation has centred on a figure of €7m. Minister Noonan told the Dail a week ago that NAMA had not made any provision for an accrual for these costs in its last quarterly accounts, but we will expect NAMA to make a proper provision in its year end accounts.

(5) NAMA’s disposals and profit/loss thereon. It came as a surprise on here to learn a week ago that for the 22 months to the end of September 2011, NAMA had booked disposals of €2.7bn in its accounts. This was surprising because NAMA has been mentioning figures for “approved sales” of €6bn-plus, though of course some approved sales fall through, others take time to complete and some sales may result in payments to other lenders eg Ulster Bank where there were syndicated loans. But even more surprising was the fact that NAMA had booked a profit of just €132m on these €2.7bn of sales because the perception had been that most of these disposals were of the best quality assets in the most liquid markets, ie London where residential and commercial property prices have performed well since NAMA’s valuation date of November 2009. We’ll want to see how NAMA accounts for its biggest single sale to date, the €800m sale of loans in Paddy McKillen’s Maybourne group to the billionaire Barclay twins, which Paddy is presently challenging in a London court. NAMA might have to reverse that transaction and pay Paddy damages – how will the Agency recognise these risks?

(6) Staff and directors’ costs. Although some will begrudge Brendan McDonagh his 2011 salary of €430,000 – which he has agreed to reduce to €365,000 for one year in 2012 – and his bonus – contractually up to €258,000 but which he 100% waived again for 2011 – you might have sympathy for the man when he looks across to IBRC, as Anglo/INBS is now called, where Mike Aynsley cost that company €866,000 in 2011 comprising salary €500,000, pension €125,000, car allowance €38,000 and “other” of €203,000 which includes rent, personal travel and “relocation”. The boss of Blackstone took home almost €200m in 2011 and the boss of BlackRock took home nearly €20m. And yet, there’s Brendan who reputedly works 70 hour weeks in a highly charged political environment, in a commercial environment which is, very euphemistically, “challenging”, dealing with new teams, new legislation with individuals and companies lined up like that scene out of Airplane! with fists, baseball bats, knives and guns, waiting for their opportunity to put the boot in. Beyond Brendan, we know that NAMA chairman, Frank Daly has taken a pay-cut to €150,000. It will be interesting to see what NAMA’s newest director, John Mulcahy gets. And it will also be interesting to see what salaries are being paid to the 202 employees at the Agency. It will be fascinating to see what expenses the non-Irish NAMA director, Steven Seelig has managed to rack up in 2011 – it was €35,000 in 2010.

(7) NAMA’s profit or loss. This would normally have been the headline item in this list, but we already have a good idea of what the profit before impairment will be. Brendan McDonagh told a London audience last week that the profit before impairment would be “at least €750m”. But we know that this includes at least €250m of inflated interest income which has not yet been received and apparently depends on NAMA or the developers selling underlying property at November 2009 prices plus 9% for Long Term Economic Value. So what we want to know is what adjustment NAMA will make to its interest income and also how much it will reduce the value of its loans to reflect deteriorating property prices in Ireland.

So when will Minister Noonan publish these accounts?